Best Buy Is Rising From the Dead

Paul J. Richards, AFP/Getty ImagesCustomers carry a big screen TV out of the Best Buy during the Black Friday doorbuster sale in November.
Best Buy (BBY) stepped up Tuesday with better-than-expected financial results. The last major consumer electronics superstore chain standing saw its revenue climb 1.3 percent to $14.21 billion if you exclude the problematic appliance stores in China that it finally unloaded last month. Wall Street pros were expecting a slight decline.

The news gets even better on the bottom line as Best Buy's cost-cutting initiatives continue to bear fruit. The retailer's adjusted profit from continuing operations clocked in at $1.48 a share, up sharply from the $1.20 a share that it posted a year earlier and the $1.35 a share that analysts were targeting.

The bottom-line beat is welcome but not entirely unexpected. Best Buy has been posting better-than-expected adjusted quarterly earnings for more than a year. Its Renew Blue initiatives designed to trim overhead while still sprucing up sales are paying off. With its Five Star chain in China out of the picture, it's also not a shock to see sales starting to inch higher. Best Buy had announced back in January that domestic stores clocked in with an encouraging 2.6 percent uptick in sales during the nine-week holiday shopping period.

This is still a much brighter snapshot than it seemed Best Buy was painting earlier this year when it was lamenting external pressures -- including weak industry demand, deflationary pricing, and shoppers wising up to the point where they are bypassing the high-margin extended warranties that the chain offers -- for holding back its ultimate profitability.

Making It Rain

Best Buy is sharing the wealth. It will be returning more money to its shareholders in a couple of different ways. For starters, it will resume its existing share buyback initiatives, aiming to repurchase another $1 billion worth of stock over the next three years.

The chain is also boosting its quarterly payouts by 21 percent to 23 cents a share, pushing its yield back up to north of 2 percent. It is also declaring a one-time dividend of 51 cents a share, distributing the after-tax proceeds stemming from an LCD-related legal settlement.

Best Buy is looking pretty good, and it's why the stock's hitting new highs at a time when smaller chains are getting crushed. We've seen hhgregg (HGG) surrender more than half of its value since the start of last year and the carnage at Conn's (CONN) has been even worse.

The Coast Isn't Clear Just Yet

It's still premature to celebrate the turnaround at Best Buy. It is bracing investors for what could be a challenging fiscal 2016. The new fiscal year that began last month will be one in which Best Buy ramps up its investments to counter the negative trends in the industry.

"While these investments will put pressure on our fiscal 2016 operating income rate, we believe they leverage our executional momentum and will allow us to build a differentiated customer experience and a foundation for long-term success," CEO Hubert Joly notes in Tuesday morning's press release.

The market's forgiving Best Buy, for now. However, with Best Buy suggesting that margins will be tested in the coming quarters, it may be best for investors to see this new fiscal year play out before jumping on a stock that's already nearly doubled off last year's lows. The market has discounted a turnaround that's being established on moving ground.